Surety—Standing in the Shoes of Subcontractor—Is Barred From Asserting Defense of Concurrent Delay Because Subcontractor Failed to Seek a Time Extension as Required by the Subcontracts

Fid. & Deposit Co. of Md. v. Travelers Cas. & Sur. Co. of Am., 2018 U.S. Dist. LEXIS 162265 (D. Nev., September 21, 2018)

Clark County School District (“CCSD”) hired Big Town Mechanical (“Big Town”) as general contractor to perform HVAC upgrades at five schools. Big Town in turn hired F.A.S.T. Systems (“FAST”) to complete low-voltage work at the schools. Big Town obtained performance bonds from Travelers Casualty and Surety Company of America (“Travelers”) and FAST obtained performance bonds from Fidelity & Deposit Company of Maryland (“F&D”).

Following FAST’s default on its subcontracts, F&D opted to complete FAST’s work and hired a substitute subcontractor, Perini. In May 2012, Perini notified Big Town that it had “substantially completed” all of FAST’s work. After Big Town refused payment, F&D filed suit against Big Town and Travelers in early 2013. In May of 2013, CCSD rejected Big Town’s final payment application, stating that the project was incomplete and claiming there were significant defects in the work. CCSD then sued Travelers seeking specific performance and liquidated damages for delay. Travelers eventually settled CCSD’s suit but through its counterclaim sought reimbursement from F&D for its settlement plus costs expended to complete the project.

F&D moved for partial summary judgment, asserting that because Big Town contributed to the delays in completing the HVAC work, Travelers—standing in Big Town’s shoes—could not establish that FAST caused the liquidated damages to accrue. F&D argued that any delays attributed to FAST ran concurrent to delays caused by Big Town and therefore FAST was not the “but for” cause of the liquidated damages.

Relying on California Court of Appeal’s decision in Greg Opinksi Construction, Inc. v. City of Okadale, 132 Cal. Rptr. 3d 170 (Cal. Ct. App. 2011), Travelers argued in response that where a subcontractor fails to comply with mandatory subcontract procedures pertaining to requesting an extension of the subcontract time, the subcontractor is responsible for all delay damages and loses the right to assert that others caused the delay. The District Court agreed, finding that FAST’s exclusive remedy for delay was to request an extension pursuant to the subcontracts and that failure to request an extension would act as a waiver of a claim for delay damages. The Court reasoned that this provision was intended to allocate the risk of delay costs. Accordingly, the Court held that FAST’s failure to request an extension of time as specified in the subcontracts precluded F&D from asserting the concurrent-delay defense.

F&D argued that it was not bound by the time-extension provision in the subcontracts because those provisions were in the Big Town-FAST subcontracts, to which F&D was not a party. The Court rejected this argument on the grounds that F&D took over performance once FAST defaulted and therefore stood in FAST’s shoes. F&D then argued that it could not comply with the time-extension provisions because once CCSD declared Big Town in default, the subcontracts were terminated. The Court also rejected this argument because Big Town’s default occurred a year-and-a-half after FAST’s default and a year after F&D’s team declared the work complete.

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